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Given the utility function and total wealth, calculating expected wealth, expected utility, actuarially fair premium, and maximum premium willing to pay.

Let's say you have a total wealth (W) of $100,000, which includes a car worth $20,000. The probability of losing your car (over one year) is 25%. Your utility function is U(W) = ln(W).

(a) What is your expected wealth for the next year?

(b) What is your expected utility for the next year?

(c) What is the actuarially fair premium (AFP)?

(d) What is your expected utility if you pay the AFP for full coverage (b = $20,000)?

(e) What is the maximum premium you are willing to pay?

Illstrate what is the amount of the difference among the maximum premium and AFP and what is this called?

Business Economics, Economics

  • Category:- Business Economics
  • Reference No.:- M918246

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